Giving away equity but repay it quickly to mitigate the risk

Anonymous

Last updated on May 25th, 2017

I am the founder of a company. I had previous experience with a software company, working closely with 2 previous successful product releases. I used this experience to solve a problem i seen in that industry I was working in and founded my own company.

I worked on it, slowly initially as i managed the project while paying a part time developer over a 2 year period. I then got a small bit of funding through an accelerator and went full time for the last 6 months. That funding period has ended and I have taken up a 1 month contract to help continue to fund it. I have gotten it from idea stage to beta stage.

I have managed to get almost 200 companies to signup in the last 10 weeks to offer their feedback however it is not in a position to be used in a real world business until I add the final key features and some optimization.

I expect it will take approx 3-4 months to get to this position where it is ready to be used in real world business environments and a further 1-2 months until I work with those company refining issues and fixing any bugs. So approx 4-6 months until I am in a position where I will be charging for it.

By that time I expect to have around 400-600 companies signed up and around 10,000 to 15,000 target market contacts built up that I can promote to. The feedback I have gotten from the 200 people trialing it who are my target market is very positive and a decent percent said they would be interested in purchasing once the final features were added. I expect from the initial launch and promotion I should be able to build it up to €5,000 MRR since I would have spent the last few months building up a large amount of credible contacts. This is with very modest conversion rates so I believe it is quite achievable.

The problem is the initial funding from the accelerator has ran out, I have funded this months development by picking up 1 months contract work that probably wont be available next month. I have to either get funding or pick up a job and try and fund it out of the job but I have already put around €40,000 into the project some of which are personal loans so my costs are already high and essentially I will likely be only able to keep the site running and would very little left for development.

I want to try and get some private funding, there are a bunch of accelerator options open to me that might get me €30-50k but it will likely take months before that is finalized if I was successful at which point the project would stand still in the meantime.

I know that the risks involved are high with a startup and I feel so confident in my project I want to burden some of the risks as I am so close to being in a position where I will be making a profit. I will admit I do not have a great deal of experience in equity so this might be a very naive question. Is it possible to give away equity but also add a condition that I pay back x% of sales per month once I am profitable beyond a certain amount.

For example can I offer €40,000 in equity for 8%. Once sales hit €5,000 MRR or above I will agree to pay them back 10% of sales per month. In that scenario if I was to achieve sales of €5k and increased that to €10,000 within 6 months and €15,000 within 12 months they would likely get their full money back within 2 years and more importantly they would start seeing a return within a short space of time on a regular basis.

I would also be happy to agree to a condition where I double the equity % if the minimum sales (€5,000) was not achieved within 6 months of launch or 12 months from the initial deal.

Since it is pretty competitive out there and I have a lot of confidence in my project I think it makes sense but I haven't really heard about deals like this so maybe there are rules and guidelines preventing these from being legally agreed or something or what is the best way to proceed so I can take away the risk from the investor and stand out from other companies?

The other scenario that would work is getting a developer on board to work for 4-6 months for sweat equity but I think that will be extremely difficult from what I have read so would appreciate any advice.

- To clarify, i am not saying to buy back the equity, I am returning the full investment if reasonably successful within 2 years (might be sooner might be longer) and still leaving them with the 8% equity. I guess it would be like dividends but paid monthly capped at €40,000. The reason why i think that would be beneficial is they can still get their money out or a partial amount of their money and can reinvest that vs another project that might take 3-4 years to get a return. They would then get a further return after 3-4 years when i exit too but they have a method to get their money back sooner if i don't turn into a big success but am still making a decent profit.

Of course a bank loan would be much better for me but unfortunately without sales there is not much hope of that, chicken and egg scenario.

As a developer I look for equity in a company I believe in. I do it for the big potential exit years down the road. I would have zero interest in selling back the equity unless things changed and I no longer believed in the company.

If you never make your revenue the equity is basically worthless, so what's the point of giving the equity if as soon as it's worth something you'll buy it back? Your offer is essentially a promise to pay later, maybe. And the "maybe" part comes with no upside, that is unless the pay rate is well above market, like double or triple, which any investor taking a revenue share would expect.

You need to better understand corporate finance. Equity is not "given" away it is distributed for some advantage to the owner of the business.
One does not "repay" equity as it is not a debt.
See http://www.Royalties.Website to read about royalties, the better way.

Your position is pretty much normal.
My point is that the entrepreneur makes a mistake if using equity as a sweetener as a success conditioned royalty, which is redeemable, is far more appropriate.
In most cases with a developer there is or will be a conflict of interest between the owners or the property and the developer. Royalties are far the better way.